Rise of Emerging Economies

Global Trends

Rise of Emerging Economies

The Rise of Emerging Economies weighs heavily on the minds of respondents this year. In particular, there was strong reference made to a coming or already happening shift in global financial centres via capital flight. Emerging economies in Latin America, Africa, and Asia are increasingly perceived as the solution to the global crisis.

Antonio Ermirio de Moraes Neto

Co-Founder and Managing Partner, Vox Capital; Member of the Global Agenda Council on Latin America

As expected, the GAC survey shows a strong trend of global power shift and capital inflows from developed to developing economies

As an entrepreneur and investor in an emerging economy, I have personally experienced the optimism of international money towards countries in their process to become part of the developed world.

Particularly in recent years, emerging economies have shown superior growth compared with developed ones. From 2006 to 2010, high-income countries have seen, on average, an annual increase in GDP of 3%, while emerging countries grew at 15% annually, accounting for 60% of global economic growth during the period.

This is very much in line with results seen in GAC Survey, which has identified the theme “Rise of Emerging Economies and Global Power Shifts” as a trend for the coming years. Respondents made strong reference to a coming shift in global financial centres, moving to developing countries and attracting substantial amounts of capital.

A small decline regarding the “Global Power Shifts” trend can be seen compared to last year’s results. A possible explanation is a weaker association between economic leadership and power, perhaps viewing economic leadership as more of a burden in today’s world.

As the headlines have shown during the last years, China has been one of the stars of the debate. Projections made by Goldman Sachs in 2006 showed China surpassing, in GDP terms, the US economy by 2027. More recent estimates from BNP Paribas show this same economic overtaking occurring already by 2020.

Independently of when China will assume the world’s top position in economic terms – although this is only one aspect of “power” – the fact will represent the first time in modern history an emerging country achieves this. A new record was already set by China in the first semester of 2012 as the leading recipient of Foreign Direct Investments (FDI).

But not only China is raising attention. Emerging economies absorbed, for the first time as well, roughly 50% of the world’s FDI in the first half of 2012. Brazil ranked 6th place, while Cambodia growing its inflows by more than 165% and Thailand by 62%, over last 2011 first two quarter results.

Despite the momentum gained by these economies in the last years, signs of a slowdown are already clear, resulting from cyclical and structural factors. Exhibits of this are China’s 7.6% growth in the year until the 2nd quarter of 2012, Brazil’s most recent projections of a 1.5% increase in GDP in 2012 (it was 4% in April 2011) and India’s struggle to control its double-digit inflation.

Structural factors represent a major influence in the slowdown: constraints in infrastructure and poor human capital are among the most important ones. Brazil, Argentina, Colombia and Indonesia, for example, still place amongst the 10 last positions in PISA’s education ranking. China, despite being well ranked, had less than 20% of its 25-34 years old population with upper secondary studies, compared to an average of 70% of G20.

In balance, despite structural challenges, emerging economies are still expected to drive a significant part of world’s GDP growth during the next years while Europe and US scenarios remain uncertain.